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Edited Transcript of SB earnings conference call or presentation 4-Sep-19 12:30pm GMT

Q2 2019 Safe Bulkers Inc Earnings Call

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Safe Bulkers Inc earnings conference call or presentation Wednesday, September 4, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Konstantinos Adamopoulos

Safe Bulkers, Inc. - CFO & Director

* Loukas Barmparis

Safe Bulkers, Inc. - President, Secretary & Director

* Polys Hajioannou

Safe Bulkers, Inc. - Chairman & CEO

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Conference Call Participants

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* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* James Monigan

Citigroup Inc, Research Division - Senior Associate

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers' conference call to discuss the second quarter 2019 financial results. Today, we have with us from Safe Bulkers, Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; and Chief Financial Officer, Mr. Konstantinos Adamopoulos. (Operator Instructions)

Following this conference call, if you need any further information on the conference call or on the presentation, please contact Capital Link at (212) 661-7566. I must advise you that this conference is being recorded today.

Before we begin, please note that this presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning future events, the company's growth strategy and measures to implement such strategy, including expected vessel acquisitions and entering into further time charters. Words such as expects, intends, plans, believes, anticipates, hopes, estimates and variations of such words and similar expressions are intended to identify forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates, which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, changes in the demand for drybulk vessels, competitive factors in the market in which the company operates, risks associated with operations outside the United States and other factors listed from time to time in the company's filings with the Securities and Exchange Commission. The company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company's expectations with respect thereto or any change in events, conditions or circumstances on which any statement is based.

And now I pass the floor to Dr. Barmparis. Please go ahead, sir.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [2]

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Good morning. I'm Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the second quarter of 2019.

The charter market was weak during the first half of 2019, and this explains substantially our marginal losses last quarter. The average BDI during the first half of 2019 was 895 points. Since then, the charter market has improved, and the average BDI for the large part of the third quarter was 1,904, more than double. Presently, we are entering in new charters at improved rates. As we see in Slide 4, despite the concerns of the trade war, both Capes and Panamaxes are performing at the highest levels in 6 years. Capes are trading today at about $38,000 per day compared to $20,000 in the same period in 2018, and Panamaxes at about $18,000 per day compared to $12,000 for the same period in 2018.

On the top left graph on Slide 5, we present the Chinese iron ore imports stocks. There is a developing shortage in port stocks, which are well below the 3-year average. At the same time, as presented in the top right graph, the prices of the iron ore have dropped significantly. After the resumption of exports from Brazil, the supply of iron ore in the market is ample. The combination of low stocks and low iron ore prices is expected to encourage increased iron ore imports.

In the coal market, as shown in the bottom left chart, Chinese imports of thermal coal have been fairly supported during summer months, explaining partially the positive outlook of Panamaxes. Furthermore, in the bottom right graph, the global seaborne grain trade looks stable and is forecasted to slightly increase in 2020. However, we are monitoring closely the developments in this sector, mainly due to trade war concerns. Presently, Panamax market is mainly driven by the strong demand for grains transportation ex East Coast South America.

Let's move on to Slide -- to supply dynamics and fleet outlook in Slide 6. For Panamax to Post-Panamax class, the order book, which is to be delivered until 2021, stands around 10% of the existing fleet. The order book has been fairly stable for the past 18 months. Trade war concerns and expenditure in environmental investments have caused easing in the new fleeting orders. This 10% order book should be compared to the 17% of the fleet, which is over 17 years of age. Older vessels lagging technologically and in terms of fuel efficiency having to pass the special surveys, for example, the fourth special survey for vessels of age below 20 years, we expect it will result in picking up of scrapping.

Ballast water treatment systems and IMO 2020 regulations require substantial investments and a vast technical and operational capabilities. Until the end of second quarter, we have invested $20.5 million. As of today, as shown on Slide 7, we have completed the installation of ballast water treatment system in 15 of our vessels; and in another 8 vessels, the ballast water treatment system will be installed by the end of 2019. We have also completed the installation and commissioning of scrubbers in 5 vessels, expecting to reach a figure of about 10 vessels by the end of the third quarter and 19 vessels by the end of the year. Not only installation but quality of equipment, we installed Alfa Laval, technical design, selection of materials, commissioning and training, which are paramount importance in order to achieve the long-term performance of the scrubbers and the financial returns. In addition, we are gradually completing the chemical cleaning of tanks for vessels that we do not install scrubbers, so that we will be able to use compliant fuels from now on. Our energy-efficient vessels, as the case for most of our ships that we do not install scrubbers, will have an advantage over heavy consuming older vessels next years onward, not only due to the consumed quantity of fuel, but also due to the price differential between the high sulfur fuel oil and the compliant fuels.

In the next 2 slides, we presented a few market data about the installation of scrubbers and price differential of fuels. In Slide 8, on the top graph, according to data from Clarksons on dry bulk, about 10% of the total fleet will be scrubber fitted by the end of 2019 and about 14% will be scrubber fitted by the end of 2020. Regarding the total portion of growing fleet, about 11% of the fleet and 15% of the fleet will be scrubber fitted by the end of 2019 and 2020, respectively. As shown on the bottom graph, scrubbers retrofitting activity as per data provided by brokers based on ICE systems, after May 2019, in the Capesize class, there are constantly about 6 million to 10 million deadweight tons that in CPS installing scrubbers and/or undergoing scheduled dry dockings.

As said before, this may in turn interpret the reduced supply of tonnage on Capes by about 2% to 3% weakness after May 2019, creating tightness to the demand/supply balance.

Turning to Slide 9. Approaching January 2020, the market is entering into a more dynamic phase in preparing for the compliance with IMO 2020 regulations. Demand for compliant fuel has started to pick up despite the fact that the majority of the shipowners have not yet moved to physical purchases of compliant fuel. The spread differential between heavy sulfur fuel oil and IMO 2020 compliant fuel in Rotterdam stands at about USD 160 per metric ton, presently. Looking at the future pricing, the spread differential for the full 2020 stands at about USD 220 per metric ton. As we approach the end of the year, we expect the dynamics of the market will be reflected to the spread differential.

Summarizing in Slide 10, the main key takeaways are: Market is in an uptrend, trading at 6-year high. And the resumption of iron ore trade from Brazil and strong grain demand from East Coast South America are driving the chartering market. The existing order book is relatively low compared to the number of older vessels that may face the market challenges. Scrapping is expected to increase.

New environmental legislation, ballast water treatment system and scrubbers involves substantial investments and creates tightness in the supply market diverting use of funds from new orders. The vast majority of vessels in the Panamax to Post-Panamax Class will not be equipped with scrubbers and as a result slow steaming may be introduced to compensate for the potentially increased fuel costs. Older vessels towards their fourth special survey may be scrapped. And finally, Safe Bulkers is fully prepared for the new environment of IMO 2020 that will start on January 1, 2020.

Now our Chief Financial Officer will present our quarterly financial results.

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Konstantinos Adamopoulos, Safe Bulkers, Inc. - CFO & Director [3]

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Thank you, Loukas. And good morning, everyone. In Slide 12, we present our quarterly time charter equivalent, which stood at $11,970 per day, and we focus on our expenses, both OpEx as well as G&A. The aggregate figure for second quarter of 2019 was $5,981. This was a result of decreased maintenance, general stores and spares and increased management fees charged by our managers.

Moving to Slide 13. We present some financial data on a quarterly basis. Our quarterly revenues, our adjusted EBITDA and operating cash flow have been improving our overall financial strength.

Slide 14, we present our daily free cash flow waterfall for the second quarter of 2019. We have earned about $20,000 and burned less than $10,400 per day per vessel for all our daily outflows, including operating G&A, interest, preferred dividend and principal repayments, leaving about $1,600 per day per vessel as daily free cash flow.

Slide 15 shows our quarterly financial highlights for the second quarter of 2019 in comparison to the same period of 2018. Net revenue decreased by 3% or to $45.5 million from $47 million, mainly due to a decrease in charter rates. Our time charter equivalent rate per vessel decreased by 9% to $11,970 per day from $13,225 during the same period in 2018. Daily vessel OpEx decreased by 4% to $4,615 compared to $4,809 for the same period in 2018, whereas daily vessel OpEx, excluding dry docking and predelivery expenses, decreased by 2% to $4,283 for the second quarter of 2019 compared to $4,392 for the same period in 2018. Our adjusted EBITDA for the second quarter of 2019 decreased by 9% to $21 million compared to $23.1 million for the same period in 2018. Our adjusted loss per share for the second quarter of 2019 was $0.01, calculated on a weighted average number of 101.3 million shares compared to adjusted earnings per share of $0.02 during the same period last year calculated on a weighted average number of 101.5 million shares.

Closing our presentation, Slide 16, we present our quarterly fleet data and average daily indicators in comparison to the same period of last year. We would like to emphasize that in this period, we have worked extensively in implementing environmental investments in scrubbers and ballast water treatment systems. Our press release presents in more detail our financial and operational results. And we are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We would now take our first question. Please go ahead. Your line is now open.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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This is Ben Nolan from Stifel. So there was -- I have a handful of questions. The first one is, if you said something I missed it, and I didn't see it in the press release. Do you have any update on where you stand on the buyback program? Didn't look like the share count moved much, but I know that, that was something that you'd talked about in June.

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [3]

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Yes. Loukas can update.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [4]

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The buyback program is ongoing, but minor actions -- minor shares have been bought back until now.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [5]

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Okay. And so it's still -- well, I think there was a 5 million share allocation. Still pretty close to that is what...

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [6]

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No, it is...

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [7]

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It's happening, but it's a very small amount, as the market went quiet.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [8]

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Yes. All right. No, that's helpful. And then I was going to ask, the G&A expenses were a little bit higher than what I thought. And I know that there was a footnote in there that the manager -- the daily rate for the manager had gone up a little bit. Just curious, can you maybe walk me through that? And how to think about the G&A going forward and the fees there?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [9]

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G&A expenses also and the expense for the manager are related also to the euro. And as a result, sometimes we may see, based on the euro exchange, certain differences, which are not related to the actual amount, but they're related to the translation in U.S. dollars.

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Konstantinos Adamopoulos, Safe Bulkers, Inc. - CFO & Director [10]

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Also, there has been substantial increase on D&O insurances from various lawsuits on other companies, which is affecting all shipping companies, irrespective if you have a clean record or not.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

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Okay. So given that insurance inflation, the G&A sort of where it is, is it fair to assume that's probably where it will be close to that going forward?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [12]

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Yes, yes. That is correct, yes.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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Okay. All right. And that -- well, the other thing I was curious on. This is pretty late, it's fairly late in the reporting cycle. And I looked, last year, you guys reported at the end of July. Was there anything specific that caused the need to be September 4 rather than kind of the normal reporting period?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [14]

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Look, we were expecting a better market and we'll post the results just after the holidays, just after the holidays because it was pointless to report it on August 10, nobody will pay attention. Even now, with the Labor Day holiday, it's a bit quiet market in the public markets. Whilst freight market has barely caught up, it's quite the opposite in the public market, in the stock market -- in the shipping stock market. So we decided to do it right now instead of middle of August.

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Operator [15]

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We will now take our next question. Please go ahead. Your line is now open.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [16]

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James Monigan on for Chris. Just sort of a higher-level question. You seem to have highlighted every band in the BCI during the quarter, which didn't really come through in the P&L or the TCE rates. I wanted to get a better understanding of basically why, and it may be an event a little bit more isolated and if it might come down in the future?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [17]

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Can you repeat? Can you repeat because I didn't get it. I didn't get what you're saying about the charter rates, why they were lower than the previous quarter?

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James Monigan, Citigroup Inc, Research Division - Senior Associate [18]

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Something along those lines as well as you seem to have -- you highlighted a strong band in the BCI. Wonder -- don't have an understanding of why that didn't come through on the P&L?

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [19]

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Yes, because there the TCE was lower, because the Q2 results were affected by a very terrible first quarter, which was, the spot market, you remember, was $5,000 a day in the first quarter or $6,000, or that sort of rate. So all those numbers sweep everything in the results of Q2, which we are reporting now. And as in our press release, we mentioned that BDI is more than double in the third quarter than what it was in the first half of the year.

Sure. I mean, when you have BDI below 900 as an average in the first half, you understand that this is a very weak BDI to work on in the market during the first 6 months of the year. But right now, we are more than double this number. The results were affected by this. But we -- I think we reported just $0.01 loss, which is by far one of the best results in the market for this quarter.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [20]

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Got it. So you had also mentioned -- highlighted essentially the Chinese iron ore market picking up stimulating demand. Actually, I wanted to understand if you had actually seen some of the demand coming through? Or if that was something that might happen later in the year or possibly in 2020? Or if that's something that's going on now?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [21]

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No, we are seeing more movement of iron ore from Brazil. You remember what the big Brazilian accident in January, which affected the tariff in the Capesize market in the first half of the year. Brazil now is back on track, and there's tremendous shortage of Capesize vessels in the Atlantic. We are seeing higher (inaudible) rates of $60,000, $70,000 days -- a day for Capesize bulk carriers from the Atlantic to the Pacific. And this is filtering through in the Pacific rates, where our ships at Post-Panamaxes are doing rounds right now at $19,000, $20,000, $21,000 a day on the round voyage basis. These ships were doing $8,000 in the spot market in the first half. So you can see, these are -- this is affecting positively and will be shown in the next quarter results our numbers, and we are very optimistic because we're entering a phase of change of the fuel oil in January. Until now not even 20% of the vessels that will fit scrubbers have done it. So there is plenty of work still to be done in 2020 on ships converting to scrubber fitted. This will keep a lot of supply off the market. There are more delays in the shipyard. We are seeing ships that are spending at other yards, 60 or 65 days to fit the scrubbers, because of the workload in the docks. We're achieving Cosco shipyards roughly around 30 days on our ships. So we're optimistic that this disruption, will keep the rates very -- at very healthy levels for the next 5 or 6 quarters, not only for the next quarter.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [22]

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Got it. And then one more quick one. You highlighted the chemical cleaning in the tanks. Just wanted to understand if there's any dry docking impacts to that? Or that is something that could actually be done during the course of operations?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [23]

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I'll leave Loukas to answer. It's in the course of operation, but Loukas, he knows the details of it.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [24]

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Look, I mean, we have a specific schedule for all the vessels that we are not fitting scrubbers. So we're using a chemical treatment of -- during bunkering in -- for a few times, and we monitor the sludge that is accumulated there. So basically, we believe that we are quite ready to accept the -- we don't expect to have a downtime on that.

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Konstantinos Adamopoulos, Safe Bulkers, Inc. - CFO & Director [25]

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We have started the process of the chemical cleaning primarily in 2019. So this have already worked through the tanks, and the results are very positive.

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Operator [26]

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(Operator Instructions) We will now take our next question. Please go ahead. Your line is open.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [27]

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It's Randy Giveans from Jefferies. So a couple for me. Just looking at your fleet, you have 5 Panamaxes over 15 years of age, and what appear to be earning a discount to kind of the modern Panamaxes in terms of their short-term rates. So would you look to sell those assets and renew your fleet with more modern second hands? And if so, which asset class would you like to grow in?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [28]

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Yes. Look, those ships are earning less because the ships we fixed when the market was low. We decided to fix those ships for a period, instead of earning $3,000 or $4,000 a day in the first quarter, we decided at that time to fix up $8,000, $9,000 or $10,000 for something like 8- to 10-month period to achieve some better rate. So they are still running off on those numbers. It's winding out of the charters that we did earlier in the year. So we kept the bigger ships available to work the spot market and to be able to capitalize on the increase -- on the expected increase. I was always talking about a very strong second half of the year on the Capesizes. So we must open all the big ships from the spot market, and we have chartered, of course, some of the smaller ones in the first half because you can understand you cannot leave the whole fleet in the spot market when it's still dull, $4,000 and $5,000 or $6,000 per day. So the charters are all coming off by the end of the year, and we expect them to be rechartered, but much healthier rate. For example, we have a ship that, yesterday, one of our charterers fixed almost $20,000 a day for a South America cargo to the Far East. So these ships can compete in the market. It's a matter of timing when they will open for employment.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [29]

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All right. And then just looking at fleet renewal, thoughts on maybe selling those, buying some more second hands, and if so, what asset class?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [30]

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Safe Bulkers will do a small fleet renewal as the market improves. We'll go into modern ships less than 5 years old or resales. We don't want to add to the order book. We already bought one resale and -- which is for delivery early next year. And we want to do a slow fleet renewal, but it is not the right time right now to do the full fleet renewal because we are deleveraging as well. We have the investment in the scrubbers, we want to collect money from all these actions and then to go into a bigger scale fleet renewal.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [31]

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And in terms of asset classes, across the board, growing the Cape?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [32]

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Look, our big expertise is Panamax to Post-Panamax. We will stay there with a bit of a flavor on the Capesize as well. But Capesize, we prefer to go for them when we have long-period charters. We're not speculators in the Capesize market because we don't have a big enough fleet there to compete, once you have a very big fleet on Panamax, Kamsarmaxes and Post-Panamaxes. So it's -- our specialization and connections in the market is in the Kamsarmax to Post-Panamax market is where we tend to concentrate.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [33]

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Got it. Okay. And then looking at your balance sheet. As your cash continues to increase, I know it's higher currently than it was at the end of June, scrubber CapEx will be winding down in the next few months. So are additional share repurchases the #1 use of cash after that? Or maybe look at buying back some of your preferreds?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [34]

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Yes, if the market would not reflect -- if the share price does not reflect the current improved freight rate environment, I think the best option would be the share repurchase and then all the others. But we see how the market will respond in October or November as we are covering pace and we are getting closer to the IMO deadline. You remember we are one of the only companies that will be 100% finished with the scrubbers before the end of the year. Very few companies in the world have -- will be able to achieve these results, to be ready on 1st of January. Already the calendar 2020, the spread between HFO and compliance fuel is $220 in Singapore. So -- and we are still in September. So we expect this number to be increasing as we go nearer to January, and we're in a good position to capitalize on this investment, which we did early. Our scrubbers, they -- technically, they are performing excellently. We're producing emissions of much less than 0.1%. So we can trade with the scrubbers in all conditions, in other areas everywhere with very comfortable margins. So we are there to take much more advantage of the new regulation.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [35]

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Okay. And then kind of lastly, touching on the scrubbers. We've heard of reports of delays, 2, 3, 4 weeks. Apparently, you're not seeing that, if you're still pretty confident that all your scrubbers will be installed in the next 3.5 months?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [36]

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Yes, I think only 40% of the ships that will take scrubbers will be ready by December, in comparison with Safe Bulkers which will be 100%. So I mean, we're in a very good position because we moved early and we have a very good team set up in the shipyards, which did all the work in the same shipyard. And we achieved a very good result. Already we have 5 ships running, 5 more will be done in this month, in September. So by the end of December, we will have 19 out of 20 ships working who have their scrubbers operationally. And the last one that we don't have is one of our long-period Capesize, which the investment is being done by the charterer. So this will be early next year. So we are in a very good position. I think there are many companies that they will not be even at 30% or 40% of their work by the end of the year. And some of them, they will be going through in the -- during 2020 and very -- even going to the last quarter of 2020 to finish off their program. So we are in a very good position.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [37]

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Yes, I think that we paid more attention -- we are paying more attention not only in the installation, but also in the commissioning, which is very important, and the operation because you know everybody will install. The equation is how you will operate it? When it will be able to commission it finally? And how successful this equipment will work in your ship? So this is very important compared, let's say, to just installing an equipment. Because this is not a, let's say, washing machine. It's a very big equipment that we need to be very careful, you need to have trained people, you need to have, let's say, to do the right commissioning, we need to spend time. And there, there will be a challenge for the market. And I think that it's there where we are more prepared compared to the others.

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Operator [38]

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I would now like to hand the conference back to Dr. Barmparis.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [39]

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So thank you very much for participating in this conference call. And we'll be in touch, and we are looking forward for the next quarter, where we will present the third quarter financial results. Thank you to all.

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Operator [40]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [41]

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Thank you.

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [42]

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Okay. Thank you. Bye, bye.